Clearly the oil segment within energy is in trouble. The expiring May futures contract fell to an unprecedented level of deeply negative prices, something that should be physically impossible, and the June contract has fallen under $15 per barrel of West Texas Intermediate crude. In this climate, no oil company looks viable, and oil and gas investors may find no stocks to buy in the oil patch.
It may be a hard sell to claim that the oil sector is full of cheap stocks that have to be owned blindly just because they are down so much from their highs. After all, weak oil prices are largely due to absolute demand destruction in the COVID-19 recession, magnified by the Saudi-Russia price and share war that they foolishly kicked off. It turns out that some of the independent oil and gas exploration and production players have hedged their oil production at much higher prices. Some companies are even hedged out through 2021.
24/7 Wall St. wanted to look for independent oil and gas players that are hedged on their oil production at much higher prices for 2020 and some even out to 2021. Generally speaking, these hedged companies are looking at $30 or higher per barrel (WTI) for the rest of 2020 and some into 2021. These seven names stood out in our first review, in which updates have been offered over the past 30 days or so.
This year is proving to be brutal for the oil and gas sector. A fresh screen of about 125 independent oil and gas players showed a significant number (more than 40) had stocks trading under $1 and a large majority had share prices under $5. Some of these stocks have fallen 75% or more from their 52-week highs.
If a company is hedged, and as long as its counterparties are operating and all markets are functioning normally, their revenues should be able to remain higher than normal even with the spot price so much lower. That said, it’s obvious that there has been discord in the markets and that some of the exchange-traded products are not functioning properly. When companies announce updates to their liquidity and hedging strategies, it is not uncommon for them to use certain price assumptions, and it is also common for them to remove any prior guidance, if they are updating their guidance.
24/7 Wall St. used some data from Criterion Research and Standard & Poor’s, as well as from screens in press releases and SEC filings covering oil-hedging activities within the past 30 days. As a reminder, companies can change their hedges, and hedges should always be considered as snapshots in time and based on the then-current pricing conditions if they are disclosed by each company. There are no assurances that hedged companies will post profits, and many of these companies have seen their stock prices remain weak. Many oil and gas dividends have been considered at-risk as others have lowered their payouts.
Cimarex Energy Co. (NYSE: XEC) updated its outlook for a 55% to 60% reduction in capital investment program this year from its original guidance of $1.25 billion to $1.35 billion. The company also announced that it has deferred completion activities and that it plans to drop all but one drilling rig in early May. Cimarex also announced that is has curtailed approximately 30% of its volumes for May, while maintaining that it has the ability to adjust its investment in the second half of 2020 as (or if) conditions change.
The firm Stifel recently had a contrarian Buy rating on Cimarex and others. While it has gas hedges as well, the weighted average production floors and barrels per day were as follows:
- Q2-20 34,341 bbl/d at $$48.29;
- Q3-20 41,000 bbl/d at $40.91;
- Q4-20 41,000 bbl/d at $49.84;
- Q1-21 33,000 bbl/d at $38.71;
- Q2-21 23,000 bbl/d at $34.00;
- Q3-21 14,000 bbl/d at $29.71;
- and Q4-21 14,000 bbl/d at $29.71.
Devon Energy Corp. (NYSE: DVN) issued an update to its 2020 capital expenditure outlook and hedge positions on March 30. It was reducing capital expenditures by an additional $300 million for the full-year to approximately $1 billion, for a total reduction of approximately 45% from its original 2020 capital budget. As far as hedging, it said:
As previously disclosed on March 19, 2020, the company has approximately 80 percent of its estimated oil production in 2020 protected at an average floor price of nearly $45 WTI. Additionally, Devon has secured hedges on approximately 40 percent of its estimated natural gas production in 2020 at an average Henry Hub protected floor price of $2.35 per million cubic feet.
Diamondback Energy Inc. (NASDAQ: FANG) announced lower production and lower capital spending on March 31. The company had a total of 178,800 bbl/day protected in 2020 and said that 98% of those hedges had unlimited downside protection as a swap, put or collar. It also has an average of 83,500 bbl/day of hedge protection in 2021 via collars and swaps. After looking at the tables of collars and on its larger portions of production, the floors for the rest of 2020 were $35.56 and $37.74. That said, there were 10 different items covering swaps, puts, costless collars, costless put spreads and additional swaps.